In deciding a motion to dismiss under Rule 12(b)(6), this
Court, "accepting all factual allegations in the complaint as
true and drawing all reasonable inferences in the plaintiffs'
favor,"*fn2 must dismiss the action if "it is clear that no relief
could be granted under any set of facts that could be proved
consistent with the allegations."*fn3 The Court's role is "to assess
the legal feasibility of the complaint, not to assay the weight
of the evidence which might be offered in support thereof."*fn4
"General, conclusory allegations need not be credited, however,
when they are belied by more specific allegations of the
complaint."*fn5

[273 F. Supp.2d 356]

In the fraud context, plaintiffs do not enjoy a "license to
base claims . . . on speculation and conclusory allegations."*fn6
Federal Rule of Civil Procedure 9(b) requires that "[i]n all
averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity." The Second
Circuit has held that, at a minimum, the complaint must identify
the statements plaintiff asserts were fraudulent and why, in
plaintiff's view, they were fraudulent-specifying who made them
and where and when they were made.*fn7 This particularity
requirement is reinforced by the Reform Act, in which Congress
required that all private securities class action complaints
alleging material misrepresentations or omissions "shall specify
each statement alleged to have been misleading [and] the reason
or reasons why the statement is misleading."*fn8

In deciding a Rule 12(b)(6) motion, the Court may consider the
following materials: (1) facts alleged in the complaint and
documents attached to it or incorporated in it by reference,*fn9 (2)
documents "integral" to the complaint and relied upon in it, even
if not attached or incorporated by reference,*fn10 (3) documents or
information contained in defendant's motion papers if plaintiff
has knowledge or possession of the material and relied on it in

[273 F. Supp.2d 357]

framing the complaint,*fn11 (4) public disclosure documents required
by law to be, and that have been, filed with the Securities and
Exchange Commission,*fn12 and (5) facts of which judicial notice may
properly be taken under Rule 201 of the Federal Rules of
Evidence.*fn13

PROLOGUE

The two cases before the Court are part of a large group
assigned to this Court by the Multidistrict Panel for
consolidated administration. These cases, and the New York
Attorney General's report which precipitated them, brought to
specific public attention certain aspects of the internal
operations in securities firms that had notoriously and long
existed and had been variously publicized but not focused on as
undesirable conflicts that should be ameliorated, modified,
conceivably controlled or eliminated.

Securities firms had traditionally employed on their rosters
paid professional analysts to furnish their opinions and
predictions of future targets of prices for the securities being
handled by the firms, in effect "risk advisors." Those opinions
and predictions were broadcast extensively and distributed free
of charge. No customer relationship with defendants is claimed by
the plaintiffs; no fiduciary or contractual relations existed, at
least none is claimed.

Those analyst "seers" and their employers have been faulted in
the present cases with having conflicting self-interests which
influenced and impaired the publicized advice and opinions by
exhortations of "BUY" advice and "Target" expectations to market
speculators in the then popular internet field.

At the times here involved, the stock markets were in the
throes of a colossal "bubble" of panic proportions. Speculators
abounded to capitalize on the opportunities presented by this
bubble.

The market "bubble" burst intervened before plaintiffs got out
of their holdings and their holdings lost value. The plaintiffs,
learning of the subsequent actions of the regulators concerning
the conflicts mentioned above, rushed to the courts in these
cases seeking to recover the losses they experienced due to the
intervening cause, the burst of the bubble.

[273 F. Supp.2d 358]

The companies involved herein were duly registered with the
SEC. Their assets, liabilities and economics were there disclosed
for any holder or purchaser including these plaintiffs to
evaluate at his own risk. What was missing, was what a willing
buyer would pay to a willing seller to own the stock-with all the
relevant information of the fully published underlying corporate
values there for everyone to see and evaluate.

In the euphoric early phase of the bubble experienced by the
market-buyers of stock traded in the optimistic expectation of
finding someone who valued acquiring and possessing the stock at
a level higher than the holder did-even if some of the risk
analysts of the stock privately had doubts from time to time, on
price, future market value, but not underlying assets.

The risk manager's forecasts on future price were both correct
and incorrect-depending on the timing of the mercury level in the
market thermometer. "Buy" or "accumulate" opinion was an
appraisal of the direction of the unsteady market fever. Those
who listened to those prognostications were rewarded with huge
paper profits if they cashed in  depending on the cycle of the
bubble. Others missed out with the collapse of the fever.

OVERVIEW

The record clearly reveals that plaintiffs were among the
high-risk speculators who, knowing full well or being properly
chargeable with appreciation of the unjustifiable risks they were
undertaking in the extremely volatile and highly untested stocks
at issue, now hope to twist the federal securities laws into a
scheme of cost-free speculators' insurance. Seeking to lay the
blame for the enormous Internet Bubble solely at the feet of a
single actor, Merrill Lynch, plaintiffs would have this Court
conclude that the federal securities laws were meant to
underwrite, subsidize, and encourage their rash speculation in
joining a freewheeling casino that lured thousands obsessed with
the fantasy of Olympian riches, but which delivered such riches
to only a scant handful of lucky winners. Those few lucky
winners, who are not before the Court, now hold the monies that
the unlucky plaintiffs have lost-fair and square-and they will
never return those monies to plaintiffs. Had plaintiffs
themselves won the game instead of losing, they would have owed
not a single penny of their winnings to those they left to hold
the bag (or to defendants).

Notwithstanding this  the federal securities laws at issue
here only fault those who, with intent to defraud, make a
material misrepresentation or omission of fact (not opinion) in
connection with the purchase or sale of securities that causes a
plaintiff's losses. Considering all of the facts and
circumstances of the cases at bar, and accepting all of
plaintiffs' voluminous, inflammatory and improperly generalized
allegations as true, this Court is utterly unconvinced that the
misrepresentations and omissions alleged in the complaints have
been sufficiently alleged to be cognizable misrepresentations and
omissions made with the intent to defraud. Plaintiffs have failed
to adequately plead that defendant and its former chief internet
analyst caused their losses. The facts and circumstances fully
within this Court's proper province to consider on a motion to
dismiss show beyond doubt that plaintiffs brought their own
losses upon themselves when they knowingly spun an extremely
high-risk, high-stakes wheel of fortune.

FACTUAL BACKGROUND
AND ALLEGATIONS

Defendant ML & Co. is a holding company through which
defendant MLPF & S provides research, brokerage, and
investment banking services. From February

[273 F. Supp.2d 359]

1999 through December 2001, defendant Blodget was a first vice
president of Merrill Lynch and its primary analyst for companies
in the internet sector. During the putative class periods,
Merrill Lynch issued research reports on a number of different
internet companies, including 24/7 and Interliant. Many of these
reports included analysts' opinions on whether investors should
buy the stocks at issue.

Plaintiffs are those investors in 24/7 and Interliant stocks
who, during the putative class periods, purchased shares in the
respective companies and subsequently lost money.*fn14 Suing to
recoup these losses, they allege that the predictions expressed
in Merrill Lynch research reports caused their losses. Reliance
is alleged through the fraud-on-the-market theory. None of the
plaintiffs alleges actually to have seen or read the analyst
reports themselves. Indeed, none of the plaintiffs claims to have
been a customer of Merrill Lynch or to have purchased the
securities through Merrill Lynch; all concede that they were
non-client purchasers.*fn15

Plaintiffs allege that the analyst opinions expressed in the
research reports were materially misleading and violated Section
10(b) of the Securities Exchange Act of 1934 (Exchange Act) and
Rule 10b-5 promulgated thereunder by the Securities and Exchange
Commission. In support of the fraud allegations, plaintiffs rely
almost exclusively on, and quote heavily from, an affidavit
prepared by Eric Dinallo of the New York State Attorney General's
Office (Dinallo affidavit).*fn16 The affidavit, filed April 8,
2002-more than a year after the close of the two class
periods-detailed the efforts of the New York Attorney General to
investigate defendants' internet research group.

The Dinallo affidavit was offered in support of an application
before the New York state courts for an order, pursuant to New
York state law, requiring Merrill Lynch employees to turn over
documents and give testimony in the Attorney General's continuing
investigation into whether defendants violated New York state
law. Soon after the affidavit became public, plaintiffs filed
these federal class action suits (now consolidated before this
Court) against defendants alleging violations of the federal
securities laws, including the federal provisions mentioned
above. The Dinallo affidavit notes that the state regulations
pursuant to which the Attorney General proceeded impose entirely
different legal requirements. "Unlike the federal securities
laws," the affidavit states, "no purchase or sale of stock is
required, nor are intent, reliance, or damages required elements
of a violation."*fn17

The research reports

The internet research group at Merrill Lynch prepared two main
kinds of reports on the companies that they followed: (1)
quarterly Sector Reports (or "Quarterly Handbooks") containing
in-depth analyses of the industry and each company in the

[273 F. Supp.2d 360]

sector covered by Merrill Lynch, and (2) reports focusing on one
particular company that took the form of comments, bulletins and
notes, which were generally issued in response to news from the
issuer or new developments or trends affecting the company that
was the subject of the report (hereinafter Company Reports).*fn18
These reports were sometimes just a few letter-sized,
single-spaced pages in length, and other times were several pages
or more in length.

The reports show that the internet issuer companies were the
primary sources of information for the Merrill Lynch analysts in
forming their opinions. Plaintiffs make no allegation that any of
the company-related information relied on by the analysts in
preparing the reports was in any way false, nor do they allege
that the analysts made up facts or misrepresented facts about any
of the companies in any of the reports. Rather, plaintiffs allege
in the main that the analysts misrepresented their true opinions
in the reports (viz., opinions as to whether the stocks should or
should not be purchased at the relevant times) and did not
disclose certain alleged conflicts of interest within the Merrill
Lynch brokerage house. In their brief, plaintiffs also claim-as
they must, if they are to have any hope of satisfying federal
securities fraud pleading requirements-that their complaints
adequately show that these alleged misrepresentations and
non-disclosures were material, were made with scienter, were
relied upon by them in making their purchases, and ultimately
resulted in their losses.

There were approximately forty-four Company Reports issued (at
irregular intervals) with respect to 24/7 Real Media, Inc. during
the alleged 24/7 class period, which stretches from May 12, 1999
through November 9, 2000. There were approximately thirty-four
Company Reports issued (also at irregular intervals) with respect
to Interliant, Inc. during the alleged Interliant class period,
which stretches from August 4, 1999 through February 20, 2001.

The analyst reports discussed the companies' financial reports
and revenue information, their respective business models and
strategy, and the issuers' own estimates of future performance.*fn19
The reports frequently contained a description of the analysts'
opinions as to the company's competitive position in the
industry, including evaluations of comparable companies. In
addition, the reports included the analysts' financial models and
projections for the companies, evaluations of past company
performance against such models and projections, as well as
discussion of estimates and projections by other analysts. All
told, these evaluations-none of which are alleged to be false or
misleading in their factual underpinnings or in their
methodology-provided background and support for the analysts'
opinions on whether the individual stocks might be considered for
purchases or for sales.

[273 F. Supp.2d 361]

Each of the company-specific research reports about which the
24/7 and Interliant plaintiffs complain carried a rating
consisting of a two-part designation: (1) a letter (either A, B,
C, or D) representing the analysts' opinion of the stock's
"Investment Risk Rating," coupled with (2) a pair of numbers
(each a numeral between 1 and 5) designating the analysts'
opinion of the "Appreciation Potential" of the stock over time.

An Investment Risk Rating of "A" denoted the lowest level of
risk. A stock with an "A" rating was expected to exhibit "modest
price volatility," and typically represented a company with
strong balance sheets, demonstrated long-term profitability, and
"stable to rising dividends." A "B" rating meant that the stock
was "expected to entail price risk similar to the market as a
whole," and represented a company that had "demonstrated the
ability to produce above-average sales, profits and other
measures of leadership within its industry." A "C" rating
indicated "above average risk," and represented companies with
balance sheets that were average or below average for their
respective industries. The "C" companies in many cases were new
to the industry or had erratic earnings.

A "D" rating, which the analysts assigned to all Internet
companies including 24/7 and Interliant, denoted the highest
level of risk. In addition to having all of the characteristics
of a "C" issuer, "D" companies were so designated because of the
analysts' opinion that the company's stock had a "high potential
for price volatility." One or more of the following factors,
among others, could have led to a company's receiving a "D"
rating: untested management, lack of earnings history, or heavy
dependence upon one product or service.

As noted above, the Investment Risk Rating for each stock was
coupled with a pair of numbers. The two numbers, each a single
digit between one and five, represented the analysts' opinions of
the stock's Appreciation Potential. The first digit reflected the
analyst's prediction of how the stock would perform over the
short term, i.e., within 0-12 months, and the second digit
represented the analyst's prediction of performance over the
intermediate term, i.e., 12-24 months. The digits signified the
following estimates:

1 BUY: Issue was considered to have particularly
attractive potential for appreciation and was
estimated to appreciate by 20% or more within the
given time frame.

2 ACCUMULATE: Issue was considered to have attractive
potential for appreciation and was estimated to
appreciate by 10-20% within the given time frame.

3 NEUTRAL: Issue was considered to have limited
potential for appreciation and was estimated to
appreciate/decline by 10% or less within the given
time frame.

4 REDUCE: Issue was considered too unattractive for
appreciation and was estimated to decline by 10%-20%
within the given time frame.

5 SELL: Issue was considered to be particularly
unattractive for appreciation and was estimated to
decline by 20% or more within the given time frame.

Thus, a rating of D-1-2 meant that the stock at issue was highly
volatile and estimated to appreciate by 20% or more within the
immediately following 12 months and 10-20% for the 12 months
following that (i.e. the period stretching 12-24 months after
issuance of the report).

I. PLEADING SECURITIES FRAUD

To recover damages in a private cause of action under
Rule 10b-5, a plaintiff

[273 F. Supp.2d 362]

must plead and prove-among other elements-loss causation. "To
establish loss causation a plaintiff must show[ ] that the
economic harm that it suffered occurred as a result of the
alleged misrepresentations." Citibank, N.A. v. K-H Corp.,
968 F.2d 1489, 1495 (2d Cir. 1992) (emphasis in original).

1. Loss causation is missing from plaintiffs' pleadings

"Loss causation developed exclusively out of case law and was
never expressly recognized by the Supreme Court."*fn20 In the
Private Securities Litigation Reform Act of 1995 (Reform Act),*fn21
however, Congress codified a uniform loss causation standard and
made it applicable to all securities fraud suits of the kind
presently before the Court. To cope with the the scandals
associated with such class suits, Congress enacted the so-called
"Loss Causation" provision:

(4) Loss causation

In any private action arising under this chapter, the
plaintiff shall have the burden of proving that the
act or omission of the defendant alleged to violate
this chapter caused the loss for which the plaintiff
seeks to recover damages.*fn22

This was necessary in the Reform Act for the goal entitled in the
legislation:

TITLE 1-REDUCTION OF ABUSIVE
LITIGATION

sec.101. private securities
litigation reform.

Plaintiffs were explicitly reminded in this Court's Case
Management Order No. 3, well prior to framing the allegations in
the consolidated amended complaints, that they should give
careful attention to pleading loss causation:

Consolidated amended complaints should also be
carefully framed in order that they may fully comply
with all applicable law regarding the pleading of
loss causation.

Plaintiffs have failed to heed this reminder.

Plaintiffs claim in their brief that "[s]ome, and perhaps much,
of the `Internet bubble' was a classic stock market manipulation
engineered by Wall Street's investment bankers and research
analysts."*fn23 There is no factual predicate or legitimate
inference from facts alleged in the consolidated complaint for
plaintiffs' semantic invention of a stock market manipulation for
internet company securities engineered by Wall Street's
investment bankers and research analysts. Not even the
freewheeling investigation and report make any such assertion or
suggestion as a prop for its criticisms.

The cited alleged omissions of conflicts of interest could not
have caused the loss of market value. The alleged omissions are
not the `legal cause' of the plaintiff's losses. There was no
causal connection between the burst of the bubble and the alleged
omissions; it was the burst which caused the market drop and the
resultant losses a considerable time thereafter when plaintiffs
decided it was time to sell. A defendant does not become an
insurer against an intervening cause unrelated to the
acquisition, e.g., a precipitous price decline caused by a market
crash. The plaintiffs controlled their ultimate exit from the
stocks after waiting no doubt for a market reversal.

[273 F. Supp.2d 363]

There are simply no allegations in the complaints, much less
particularized allegations of fact, from which this Court could
conclude that it was foreseeable that the alleged non-disclosures
of conflicts would cause the harm allegedly suffered by
plaintiffs as a result of the bursting of the Internet bubble.
Plaintiffs have also failed to allege facts which, if accepted as
true, would establish that the decline in the prices of 24/7 and
Interliant stock (their claimed losses) was caused by any or all
of the alleged omissions from the analyst reports.

Moreover, none of the Second Circuit cases upon which
plaintiffs rely have applied the so-called "disparity of
investment quality" or "price inflation" theory of pleading loss
causation to a putative securities class action in which the
plaintiffs sought to utilize the fraud on the market theory.
Rather, each involved a face-toface transaction in which the
identified plaintiffs alleged that they actually detrimentally
relied on defendants' misrepresentations and that they were
harmed as a result. For sound policy reasons discussed below,
plaintiffs' theory on loss causation should not be expanded to
fraud on the market cases, where reliance is presumed (if certain
criteria are met) based upon the assumption that in an efficient
market "most publicly available information is reflected in
market price, [and] an investor's reliance on any public material
misrepresentation, therefore, may be presumed." Basic v.
Levinson, 485 U.S. 224, 241-42, 108 S.Ct. 978, 99 L.Ed.2d 194
(1988).*fn24 In the circumstances here presented, the sound
reasoning of the Eleventh Circuit Court of Appeals in Robbins v.
Koger Props., Inc., 116 F.3d 1441 (11th Cir. 1997), should be
applied. There, the court observed that in a fraud on the market
putative class action, price inflation is typically used as a
surrogate for reliance and the closely related concept of
transaction causation. After examining the concept of proximate
causation carefully, the court reasoned that price inflation
should not be extended to satisfy the independent requirement to
plead loss causation:

Our cases have not utilized the [fraud on the market]
theory to alter the loss causation requirement, and
we refuse to do so here. Our decisions explicitly
require proof of a causal connection between the
misrepresentation and the investment's subsequent
decline in value.

Robbins, 116 F.3d at 1448 (emphasis added).

Accordingly, the court stated that in the circumstances
presented, the "showing of price inflation, however, does not
satisfy the loss causation requirement" and would otherwise
collapse transaction and loss causation, see id., a result which
even plaintiffs acknowledge would be at odds with Second Circuit
law.

Even if there was a claim that the misconduct caused the
purchase price of the stocks to be artificially inflated,
plaintiffs have failed to allege facts (as opposed to legal
conclusions) from which to infer that the alleged omissions were
a substantial cause of any inflation. In their memorandum,
plaintiffs refer to only eight of the over eighty research
reports issued by Merrill Lynch on 24/7 and Interliant during the
putative class periods and allege that the respective stock
prices rose in the days following the issuance of the research
reports. Yet despite instances thereafter when prices dropped
following reports, plaintiffs make no attempt in their pleadings
to allege facts that would support their conclusion that any
minor increases were caused by an analyst's rating as opposed

[273 F. Supp.2d 364]

to the numerous other factors, including previously non-public
internal financial information released at virtually the same
time by the companies themselves (or elsewhere in the analysts'
reports), or even the effect of reports issued by other
analysts.

Causation under federal securities laws "is two pronged: a
plaintiff must allege both transaction causation . . . and loss
causation. . . ." Suez Equity Investors, L.P. v. Toronto-Dominion
Bank, 250 F.3d 87, 95 (2d Cir. 2001) (emphasis added). The loss
causation inquiry must examine "how directly the subject of the
fraudulent statement caused the loss, and whether the resulting
loss was a foreseeable outcome of the fraudulent statement." Id.
at 96 (citing First Nationwide Bank v. Gelt Funding Corp.,
27 F.3d 763, 769 (2d Cir. 1994)). As explained in AUSA Life
Insurance Co. v. Ernst & Young, the "foreseeability query" is
whether the defendant could have reasonably foreseen that its
alleged misconduct could lead to the financial decline of the
investments which led to the harm to the investors. See AUSA,
206 F.3d 202, 217 (2d Cir. 2000) ("The foreseeability query is
whether E & Y could have reasonably foreseen that their
certification of false financial information could lead to the
demise of JWP, by enabling JWP to make an acquisition that
otherwise would have been subjected to higher scrutiny, which led
to harm to the investors.").

Here, to the contrary, plaintiffs have not alleged that there
was any link between the allegedly overly optimistic ratings and
the financial troubles of 24/7 or Interliant that led to their
financial demise in the wake of the bursting bubble, nor any
facts demonstrating that they were the cause.*fn25 Nor do plaintiffs
allege facts demonstrating that it was foreseeable that the
allegedly overly optimistic ratings would lead to the financial
demise of 24/7 or Interliant.

(b) The Burst of the Bubble  Intervening Cause

The Second Circuit has also continued to stress the need to
examine whether intervening causes are present and the lapse of
time between the fraudulent statement and the loss. Both of these
elements focus on conduct occurring after the investment decision
and after the purchase of shares at the allegedly inflated price.
For example, the Second Circuit reiterated in Castellano v. Young
& Rubicam, Inc. that "`when factors other than the
defendant's fraud are an intervening direct cause of a
plaintiff's injury, that same injury cannot be said to have
occurred by reason of the defendant's actions.'"
257 F.3d 171, 189

[273 F. Supp.2d 365]

(2d Cir. 2001) (citing First Nationwide, 27 F.3d at 769); see
also Suez Equity, 250 F.3d at 96. As the Second Circuit
explained:

The cases where we have held that intervening direct
causes preclude a finding of loss causation present
facts sharply different from those at issue here [in
Castellano]. See Powers [v. British Vita,
57 F.3d 176, 189 (2d Cir. 1995)] (market value of stock fell
as a result of recession); [First Nationwide], 27
F.3d at 772 (investor's loss caused by marketwide
real estate crash); Citibank, N.A. v. K-H Corp.,
968 F.2d 1489, 1495 (2d Cir. 1992) (loss to plaintiff
from loans made on the basis of fraudulent
misrepresentation were the result of a decline in
value of collateral unrelated to the fraud); Bloor v.
Carro, Spanbock, Londin, Rodman & Fass,
754 F.2d 57, 62 (2d Cir. 1985) (loss caused not by
misrepresentations in various documents used to
attract investments but by looting and mismanagement
of these funds by controlling stockholders).

Castellano, 257 F.3d at 189-90. These cases distinguished by
Castellano are plainly applicable to the facts here where the
overall Internet market had collapsed  causing the price of 24/7
and Interliant to decline dramatically  and where plaintiffs
cannot allege a factual link between that decline and defendants'
conduct. Yet if merely alleging artificial inflation was
sufficient, then there would be no need for any of these cases to
discuss the importance of considering whether there was the
presence of any intervening factors.

&nbsp; Indeed, the Second Circuit has held that "when the plaintiff's
loss coincides with a marketwide phenomenon causing comparable
losses to other investors, the prospect that the plaintiff's loss
was caused by the fraud decreases." First Nationwide, 27 F.3d at
772 (citing Bastian v. Petren Res. Corp., 892 F.2d 680, 684 (7th
Cir. 1990)). Yet, plaintiffs' allegations ...

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